Investment-Cash Flow Sensitivity and Financial Constraints: Indonesia Evidence

Abstract

Capital market imperfection has made the firms rely on internal cash flow as an investment funding (Investment-cash flow sensitivity). Using data from a sample of 139 non-financial firms listed in Indonesia Stock Exchange from 2010 to 2017, this paper examines whether Investment-cash flow sensitivity (ICFS) could be found in Indonesia and to test by how much ICFS in financially constrained and unconstrained firms are. The method used in this study is panel data set using E-views 9 Software to estimate investment-cash flow sensitivity. In addition, we construct financial constraints measure by extracting Principal Component Analysis with three different measures, the probability of paying a dividend, bond ratings, and firm size. The result shows that cash flow is positive and statistically significant to investment. Furthermore, Investment-cash flow sensitivity is found to be higher for financially constrained firms. To conclude, this paper provides a supporting evidence the precense of ICFS in Indonesi